About 17% of US coal production is at risk of idling or closure owing to mines’ cash costs and sustaining capital expenditure exceeding current market pricing this year, says consulting firm Wood Mackenzie.
“Years of declining productivity, thinning seams, increasing strip ratios, more stringent government regulations and a high-paid workforce have taken their toll and made Central Appalachia the highest cost region within the US. “As a result, the bulk of the coal at risk is produced in Central Appalachia, where about 72% of the total output is unprofitable,” says Wood Mackenzie senior research analyst Dale Hazelton.
He notes that, based on current economics, there is a significant number of mines unable to cover their operating costs and also sustain capital. However, mine closures are not happening frequently. Part of the reason for this is that the amount of thermal coal sold on the open market is minimal compared with that sold under contract.
“[Producers] may also be able to beat the market prices as they have a valuable niche-quality coal, such as stoker coal, or the location of the mine is near an end-user, providing a trans- portation advantage over competitors,” adds Hazelton.
Also, he points out that, for companies actively shopping the assets, having them currently in operation is more attractive to buyers. A company may also need to generate certain levels of revenue or cash flow to avoid triggering debt covenants that result in accelerated debt payments or higher interest rates.
Moreover, some companies may also be willing to temporarily lose a certain amount of money on some mines where the losses from operating are not that severe and not significant enough to require idling or closing the operation.
“This is particularly true for some of the assets recently purchased by new mining companies or private-equity firms. “ In those cases, the companies understand that there will be some period of losses as management gets costs under control. “The endgame here is to maintain operations and customer relationships until the eventual recovery,” notes Hazelton.
Wood Mackenzie mentions that regions in the US, ranging from 47% of production in Southern Appalachia to a low of 8% in both the Western Bituminous and Powder River basins, have a substantial amount of coal at risk. On aggregate, this equates to about 14% of US thermal coal production and 58% of metallurgical coal production being at risk.
Hazelton Pumps